Kaveri Seed Company Ltd Q4 FY2022 Concall Summary

Key Takeaways

• A year scarred by Q1, but exit sentiment is strong: FY22 revenue and volumes were dragged down by the Q1 nationwide shutdown, which crushed farmer confidence and commodity prices. Management says farmer sentiment has now recovered to pre-COVID levels or better.
• Cotton was the anchor, non-cotton the engine: Cotton volumes fell ~24% in FY22, while non-cotton grew ~15% and now contributes close to 65% of revenue. Hybrid rice revenue alone jumped more than 40%, taking market share from under 2% to 10-12% in five years.
• A 15-20% cotton volume rebound is the FY23 bet: Management expects cotton volumes to grow 15-20% in FY23, driven by a ~15% acreage increase and a shift back to branded seeds after farmers suffered poor yields from illegal Bt seeds last year.
• Profitability took a hit from cotton and provisions: Cotton revenue decline, higher other expenses on cotton sales, and provisioning for non-receipt of government payments all pressured margins. Management expects margins to normalize as business recovers.
• What to watch next quarter: Whether the 15-20% cotton volume growth materializes given high industry inventory and competing crop prices, and whether the promised margin recovery begins to show up.

Cotton: The Swing Factor

• FY22 damage: Cotton volumes decreased 24.29% and revenue fell ~23.04%, driven by the Q1 shutdown's lingering effect on farmer sentiment and low commodity prices. Illegal/unbranded Bt seed movement also prevented the company from realizing price increases.
• FY23 acreage tailwind: Cotton acreage has already increased close to 15% compared to the previous year, and India is expected to play a major global role in cotton as a commodity in terms of production and integrating into value-added production for the World.
• Branded seed recapture: Initial market feedback suggests farmers suffered low yields and poor performance from unbranded seeds last year, so sentiment for unbranded seeds is not as strong. If the monsoon arrives on time, management expects usage from organized players to "definitely come up."
• Pricing realism: Industry inventories are high, so the company may not realize the full price increase it hopes for; it will try based on the situation.
• Acreage ceiling: Industry cotton acreage growth is anticipated at 10-15% because alternate crop (maize, rice, soya, pulses) commodity prices are also high, giving farmers competing options.

Mithun Chand: "Last time the sentiment was really bad and we couldn't encash it on the increase in the price as there were lot of movement of the unbranded seeds in the illegal Bt."

Non-Cotton Portfolio: The Growth Engine

• Structural shift underway: Non-cotton segment grew ~15% in FY22, with contribution reaching close to 65% of revenue, up from a time when cotton was over 75% of the mix. All non-cotton crops grew in actual volumes.
• Hybrid rice standout: Revenue grew more than 40% even as the industry had muted growth, driven by product strength and distribution. New product contribution rose from 68% to 75% of volumes, and market share climbed from under 2% to 10-12% in four to five years.
• Vegetable seeds momentum: Volumes increased 21% and revenue 18%, with new product contribution jumping from 23% to 56% of volumes. Considerable revenue growth is expected in FY23.
• Maize mix upgrade: Overall maize volumes fell 16% and revenue 7.69%, but the decline was entirely in government business where tenders were not called. Normal trade revenue was up, and new product contribution rose from 10% to 24% of volumes as the mix shifted toward high-segment, high-price specialized hybrids.
• Sweet corn entry: The company is launching in sweet corn, described as a very lucrative addition to the portfolio.
• Guidance intact: Earlier guidance of 15-20% growth in the non-cotton segment stays.

Mithun Chand: "If you see rice, even the industry was having muted growth. We had grown by more than 40% in hybrid rice. So, that shows the strength of the product and the portfolio."

Margins & Profitability

• Cotton-driven pressure: Cotton revenues down more than 20% impacted overall profitability. Other expenses in cotton sales went up, and non-receipt of government payments led to provisioning (policy: provide if not received in two years), further hurting profitability.
• Non-cotton profitability: Non-cotton crops remain more profitable than cotton crops. An analyst noted non-cotton gross profit slid from above 50% to closer to 45%; management stated any increase in commodity or production price is passed on to the farmer and is not an issue.
• Recovery promise: Management stated margins will be in line with previous years and, as business normalizes, margins will "definitely achieve growth and that will happen soon."
• Production cost: Slight increase in production cost but not material.

Regulatory & Technology Tailwinds

• Gene editing ruling: The government's recent gene editing ruling is a positive signal; management sees government acceptance and proactive work on getting new technologies into the country accelerating over the last six to eight months.
• Illegal seed countermeasure: Management argues that without accepting new technologies, people will source from illegal sources (like HTBt), which is not beneficial for farmers. Work on new technology approvals is in advanced stages, and management expects new technologies "can be allowed in India as early as possible."
• Illegal Bt sentiment shift: The initial market feel is that last year's poor experience with unbranded seeds (low yields, bad performance) has turned farmer sentiment against them, which should benefit branded seed players if the monsoon cooperates.

Mithun Chand: "What we see from the first mode going forward the government will be acting very sharp in terms of getting new technologies and the work is in the advanced stages. So, what we see is that you can definitely see some action, you can definitely see that the new technologies can be allowed in India as early as possible."

Capital Allocation & Strategy

• Seed-only focus: The company has no plans to enter non-seed businesses. Management believes the seed segment still has potential to grow more than 12-15% year-on-year, with penetration lower than other seed markets and scope for growth high with new technologies. Cash will be deployed in the seed business when new technologies arise.
• Shareholder returns: The company bought back shares worth Rs. 120 crore and declared a total dividend of 200% on a face value of Rs. 2 per share during the year.
• International expansion: The company is expanding into other countries, though no specifics were provided.
• Inventory posture: Overall inventory is in line with last year; cotton inventory is down because enough base inventory exists, while non-cotton inventory is much higher than last year. Management says it has enough inventory to support 15-20% growth and produces only for demand.

Mithun Chand: "We don't have any thought as of now to go to other segment because seed is a segment which still has a potential to grow more than 12%-15% year-on-year basis... we want to be in the seed segment and still we see long way to grow in seeds."

Guidance & Commitments

Key Metrics